Budget uncertainty complicates DoD’s audit efforts

Jan. 23, 2013 - 11:18AM
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In September, Pentagon Comptroller Robert Hale said at a congressional hearing that dealing with chronic budget uncertainty was sapping time that could be spent on audit readiness and other priorities. (Defense Department)

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The Defense Department’s quest to get its financial books in order by 2017 is running into trouble.

Prolonged budget uncertainty, the threat of steep spending cuts, the failure of some financial system upgrades and a leadership shakeup at the Pentagon are complicating a complex, years-long effort to produce auditable annual financial statements for the Defense Department.

In September, Pentagon Comptroller Robert Hale complained at a congressional hearing that dealing with chronic budget uncertainty was sapping time that could be spent on audit readiness and other priorities. Like other agencies, DoD continues to face the threat of deep, across-the-board budget cuts now set to take effect at the beginning of March.

And the Pentagon has run into serious delays in fielding automated business systems essential to meeting the audit readiness goals.

The Air Force last year canceled a troubled next-generation logistics management project after concluding that it wasn’t worth more investment. The cancellation means the service has to continue managing its inventory with some 240 legacy systems that were supposed to be replaced. Last month, the Senate Armed Services Committee asked the Pentagon to explain how the Air Force plans to meet the 2014 and 2017 deadlines. As of last week, the department had not responded, a committee spokeswoman said.

Another concern: the coming departure of Defense Secretary Leon Panetta, a former White House budget director who has pressed hard to make audit readiness a departmentwide priority, even volunteering to have one set of books, the “statement of budgetary resources,” ready by 2014, three years ahead of the original schedule.

The value of Panetta’s role can’t be overstated, said Rep. Michael Conaway, R-Texas, who chaired an ad hoc House Armed Services panel in 2011 that held a series of hearings on DoD financial management.

“Whether you get that same level of commitment out of the next [Defense secretary] is going to be essential to getting this thing done,” Conaway said in an interview.

Conaway said he hopes the issue will arise during Senate confirmation hearings for former Republican Sen. Chuck Hagel, President Obama’s choice to succeed Panetta.

In addition to these complications, the task of updating the tools and methods used to manage the department’s books is an enormous endeavor. Just the task of assigning dollar figures to the department’s worldwide inventory of equipment and real estate represents a “significant and potentially very costly challenge,” DoD officials wrote in a November update on their progress.

The Pentagon’s drive to improve its financial reporting dates back more than seven years, with its financial improvement and audit readiness plan appearing in 2005. Congress wrote the 2017 deadline into law three years ago.

The 2013 Defense Authorization Act, signed into law this month, adopts Panetta’s September 2014 deadline for the Pentagon to produce a budget statement that is auditable. This statement shows the flow of money in and out of the department, including funds received and checks written. Among the key steps needed to meet the audit-readiness goal for both this statement and other sets of books, the Pentagon must be able to document its transactions and have adequate internal safeguards against waste and abuse.

Having auditable records “is not an end by itself,” Asif Khan, a director of financial management and assurance at the Government Accountability Office, said in an interview.

“The financial statements are there so decision-makers have useful, reliable information,” Khan said.

During the next several years, the department is set to spend up to $400 million annually to improve business operations, Hale said in September.

Meanwhile, examples of financial mismanagement continue to surface. Last month, the Government Accountability Office detailed problems with the Army’s internal controls of its payroll operations. In one example, a soldier absent without leave for more than 18 months received more than $33,000 to which she was not entitled, GAO found. Another soldier who left the Army in 2009 kept receiving active-duty pay totaling about $185,000 until 2011, GAO found.

In a written response, Hale agreed that payroll processing needs to be more accurate, but called error rates “remarkably low,” given that Army pay disbursements total more than $45 billion per year.

In some quarters of Capitol Hill, impatience is growing. Last year, Sen. Tom Coburn, R-Okla., proposed moving the Defense Finance and Accounting Service to the Treasury Department if the Defense Department failed to get a clean audit of its 2017 financial statements. Coburn succeeded in adding the sanction to the Senate version of the Defense authorization bill, only to see the provision cut from the final version of the measure signed into law. Coburn will continue to pursue the provision, which won unanimous Senate approval, a spokesman said last week.

Officially, the department says it remains on track to have all of its financial statements ready for auditing by a congressionally mandated deadline of September 2017. Among other milestones during the last year, the Army Corps of Engineers, Defense Contract Audit Agency, Defense Commissary Agency, Defense Finance and Accounting Service, Military Retirement Fund and Tricare’s contract resource management wing all received clean financial statement audits for last year.

Also, the Army announced last summer that it had completed the rollout of a new financial management framework, the General Fund Enterprise Business System.